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New SEC Chief Mary Jo White Thinks the Government Should Bring Cases – 'To A Point'

More details emerge on White's troubling record

A few more things about Mary Jo White, the former prosecutor and corporate lawyer recently chosen by Barack Obama to head the SEC. Last week, I wrote about White's involvement in the notorious Gary Aguirre episode, wherein the former U.S. Attorney and then-partner at the hotshot white-shoe defense firm Debevoise and Plimpton helped squelch then-SEC investigator Aguirre's insider trading case against future Morgan Stanley CEO John Mack.

White, who was representing Morgan Stanley in this affair, went over Aguirre's head to talk directly to then-SEC enforcement chief Linda Thomsen about "reviewing" the case. After Aguirre was fired and the case against Mack went away, the official responsible for terminating the case, Aguirre's boss Paul Berger, was given a lucrative, multimillion-dollar job with Debevoise and Plimpton, closing the circle in what looks like a classic case of revolving-door corruption.

There are a few more troubling details about this incident that haven't been disclosed publicly yet. The first involve White's deposition about this case, which she gave in February 2007, as part of the SEC Inspector General's investigation. In this deposition, White is asked to recount the process by which Berger came to work at D&P. There are several striking exchanges, in which she gives highly revealing answers.

First, White describes the results of her informal queries about Berger as a hire candidate. "I got some feedback," she says, "that Paul Berger was considered very aggressive by the defense bar, the defense enforcement bar." White is saying that lawyers who represent Wall Street banks think of Berger as being kind of a hard-ass. She is immediately asked if it is considered a good thing for an SEC official to be "aggressive":

Q: When you say that Berger was considered to be very aggressive, was that a positive thing for you?

A: It was an issue to explore.

Later, she is again asked about this "aggressiveness" question, and her answers provide outstanding insight into the thinking of Wall Street's hired legal guns – what White describes as "the defense enforcement bar." In this exchange, White is essentially saying that she had to weigh how much Berger's negative reputation for "aggressiveness" among her little community of bought-off banker lawyers might hurt her firm.

Q: During your process of performing due diligence on Paul Berger, did you explore what you had heard earlier about him being very aggressive?

A: Yes.

Q: What did you learn about that?

A: That some people thought he was very aggressive. That was an issue, we really did talk to a number of people about.

Q: Did they expand on that as to why or how they thought he was aggressive?

A: I think and as a former prosecutor, sometimes people refer to me as Attila the Hun. I understand how people can get a reputation sometimes. We were trying to obviously figure out whether this was something beyond, you always have a spectrum on the aggressiveness scale for government types and was this an issue that was beyond real commitment to the job and the mission and bringing cases, which is a positive thing in the government, to a point. Or was it a broader issue that could leave resentment in the business community or in the legal community that would hamper his ability to function well in the private sector?

It's certainly strange that White has to qualify the idea that bringing cases is a positive thing in a government official – that bringing cases is a "positive thing . . . to a point." Can anyone imagine the future head of the DEA saying something like, "For a prosecutor, bringing drug cases is a positive, to a point?"

One would think that even a defense firm would value a regulator with an aggressive rep -- after all, a tough lawyer is a tough lawyer. What this testimony shows is that what is valued instead in this rarefied community of millionaire lawyers (where one can easily "get a reputation") is a talent for political calculation, and a sensitivity to what may or may not hamper one's ability to "function in the private sector." What they're looking for is someone who, when sitting in the regulator's seat, does the job, but doesn't live the job, if you catch the distinction.

Given that White has already made this move from enforcement to defense once, and given that we now know that she knows that firms like hers value regulators who can avoid creating "resentment in the business community" and retain their ability to "function in the private sector," I think it's safe to expect that White's SEC will take very good care to bring cases, but only "to a point."

A few more things about White and the Aguirre case. There's one extremely interesting section of the SEC Inspector General's report on the whole affair, and sheds some light on how these Wall Street attorneys work.

To quickly recap the case: Mack, the former president of Morgan Stanley, was between jobs in the early 2000s. He went to Switzerland to interview with Credit Suisse First Boston for a top post there. CSFB at the time was the investment banker for a company called Heller Financial, which was in the process of being acquired by GE. Right after Mack came back from Switzerland, he called an old friend, a hedge fund trader named Art Samberg from a company called Pequot Capital. Almost immediately afterward, Samberg, who had never held a meeting about Heller Financial or done any research in the firm, began buying up Heller stock. Weeks later, the acquisition took place and Samberg made $18 million. Mack, meanwhile, was cut into a Pequot deal that netted him $10 million.

In investigating this case, Aguirre sent a subpoena to Morgan Stanley for records of emails between Mack and Samberg. Now, remember, Mack by the time of the suspicious trades was no longer working for Morgan Stanley (he would return to be its CEO years later, but at the time, he had just stepped down from the presidency). Nonetheless, Aguirre wanted all the emails Mack had sent to Samberg and vice versa during Mack's first stint at Morgan Stanley. All he was looking for was proof that the two knew each other – and for some essentially circumstantial evidence about their level of chumminess.

Aguirre's theory had always been that the source of the Heller tip had been the Credit Suisse interview. He never believed that Mack somehow passed the tip to Samberg while he was still at Morgan Stanley.

Nonetheless, White called then-SEC Enforcement Director Linda Thomsen when Morgan Stanley received the subpoena, and tried to run a little game on the SEC. The SEC Inspector General later summarized White's testimony about that call:

White said she asked Thomsen "if we could accelerate the production of those emails [which were responsive to an SEC subpoena issued in the Pequot case] did she think the SEC might be in a position to say something more about Mr. Mack's exposure or not."

In other words, White proposed to Thomsen that she could speed up the response to the subpoena, if Thomsen in turn could review the emails and make a swift judgment about Mack's exposure based on that evidence – evidence that not even Aguirre thought would contain anything truly substantive about the insider trade.

Aguirre thought Mack got the tip in Switzerland. White had to know the tip could not have come from Morgan Stanley. She knew these particular emails would not show the source of the trade. Yet she wanted Thomsen to make a judgment about Mack's exposure based on this evidence. This is the sort of legal leprechaun trick that former regulators like White get paid by the banks millions of dollars a year for.

Two days after White's call to Thomsen, Morgan Stanley sent a CD full of documents over to the SEC – not to Aguirre, but presumably to someone higher up, possibly Thomsen. Again, the Mack case subsequently went away, and Aguirre was subsequently deemed a pain in the ass for complaining about this and fired. The SEC subsequently paid Aguirre a record $755,000 wrongful termination settlement.

More fun details about your new chief of the SEC. Do you feel safer? I know I do.